The year 2011 will be remembered as the year of the "Big Box," meaning those warehouse buildings larger than 500,000 square feet. Demand for these large Class A warehouse and distribution centers - especially in the major U.S. logistics markets adjoining the large population centers - was red hot most of the year.

In 2011, companies with strong balance sheets have led the charge in securing large block lease deals before conditions tip back into the landlords' hands. Tenants have been negotiating aggressively and trading up to secure the highest quality space at the best possible prices.

Leasing Up
Consumer goods companies, distribution operations for major retailers, and the third-party logistics firms that support those industries have been the most active, followed by firms in the food and beverage category.

Part of the 2011 story has also been the growing importance of e-commerce superstars, such as Amazon.com, which have emerged as an important part of U.S. industrial demand. E-commerce firms have leased multiple facilities across multiple markets riding high on the double-digit growth and strength of e-tail online sales.
Average vacancy rates in U.S. industrial markets have dipped below the 10 percent mark, and more than three quarters of the nation's largest industrial real estate markets have recorded positive absorption results. With economic uncertainty looming, leasing activity in the latter part of the year cooled, but on the whole, 2011 has marked a step in the right direction for the industrial leasing landscape.

Hub Locations in Demand
With big-box users dominating leasing, the large distribution hub markets have captured the lion's share of activity. Southern California's Inland Empire exceeded all projections by capturing nearly 40 percent of all U.S. industrial absorption. Strong demand drove vacancy rates to around 7 percent and encouraged the first real signs of rental growth and speculative development. We have also seen the return of "forwards" or "pre-commits" in the Inland Empire, where institutions began buying vacant warehouses, betting on future rent growth and leasing risk.

Central Pennsylvania was another success story accounting for nearly a third of all U.S. industrial net absorption. Other major logistics markets like northern New Jersey, Atlanta, and Dallas also all showed significant growth in lease activity. But the best news was how this activity spread to secondary markets such as Miami, Phoenix, Seattle, and Denver, which have had great leasing activity for years. This should translate into rental growth across a number of markets for 2012. With the exception of the Inland Empire, most markets did not see rental growth in 2011.

We expect to see continuing demand for quality big-box space in key logistics hubs in 2012, with the focus remaining on the Inland Empire, New Jersey (especially central), Chicago, and Dallas. More speculative developments should be planned to meet demand for prime space that can't wait for build-to-suits. We also expect to see more activity in the emerging intermodal hubs, such as Kansas City and Memphis.
Coast-Inward Recovery
Another trend stretching into 2012 is the coast-inward recovery that began at our nation's ports. Real estate values and demand have continued to grow around the country's top seaports with average vacancy rates around the 8.5 percent mark. As cargo volumes rose in 2011, so did leasing volume and demand for warehouse space around these gateway market hubs. The ports of Los Angeles, Long Beach, and New York/New Jersey have commanded the most demand, as well as a coveted spot atop Jones Lang LaSalle's Seaport Index.

The index, which rates the top 12 U.S. port markets on their real estate landscape, cargo performance, investment plans, and TEU (twenty-foot equivalent unit) volumes, also tracked the progress of other ports making annual gains, such as the Port of Baltimore and the Port of Miami.

The Panama Effect
As 2012 progresses, we will be another step closer to the 2014 completion of the Panama Canal expansion. In preparation, U.S. seaports have been gearing up to receive the larger "post-panamax" ships. We have monitored the development and investment in the form of harbor-dredging projects and the advent of public-private partnerships to kick-start development activity.

While an uptick in port traffic is expected in the coming years, pressure on portside industrial space could ensue. In 2011 the solution came through the development of new inland ports. These are intermodal distribution centers connected to seaports via a Class I railroad and are located in proximity to three million people; they have foreign-trade zone status and an abundance of large warehouse and industrial space.

We may see more of these developments anticipating new demand from the ports. With the impending completion of the Panama Canal's new set of locks, Florida has announced its first inland port, Florida Inland Port, designed to handle both incoming and outbound freight across the state.

Supply Chain Assessment
Watching freight costs will be essential in 2012. Trucking capacity is anticipated to be in short supply, especially if the second half of 2012 has positive economic growth.

As transportation costs continue to escalate, they will drive companies to re-evaluate their supply chain network strategies and locate closer to their end customers. If freight costs rise substantially, we may in fact see onshoring, with more U.S. manufacturers returning to the states seeking cost-effective locations.

Sales Volumes Up
Getting back to the "big" theme, 2011 brought big sales volumes for industrial assets. They were up approximately 70 percent over 2010 (and 2010 was roughly double the 2009 volume), with many deals in the $100 million-$200 million range. Again, distribution centers were the investors' top choice, especially in coastal and primary markets such as Los Angeles, the Inland Empire, Chicago, and northern New Jersey.

The increase in leasing fueled investor interest and anticipation of solid returns on future rental growth and spikes. Institutional investors, REITs, and pension funds and advisors have been the most active players in 2011 and will continue to dominate in 2012.

While core Class A products have become scarce, the first quarter should present some new options. As 2011 draws to a close, cap rates have retreated and some portfolios have been taken off the market. Early in 2012, they will be back on sale with fresh capital eyeing the prize.

With all the attention on core product in primary markets, cap rates will stay low, and investors will be forced to consider secondary markets to achieve higher yields. We expect many secondary markets to see increased activity in 2012, including Phoenix in the West; Indianapolis, Louisville, Columbus, and Memphis in the Midwest; and Charlotte on the East Coast.

What's Next?
While interest rates have remained favorable and lenders continue to add liquidity into the market, we are keeping a close eye on the global economy, as a European credit crisis could have a significant impact on domestic lenders.

There has been a modest recovery for industrial real estate in both leasing and sales in 2011, which has proven that the hunger for the product has returned. We hope to report an even brighter picture for 2012.